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Wednesday, May 20, 2015

What Does a Financial Planner Do?

Nick Murray is a well known member of the financial planning community who spends his time writing and speaking to advisors like us. We are big fans of his work and have cited him several time on the blog, like here and here.Of course, we don't agree with everything that Nick says, but his straight forward and simple approach to financial planning and investment management is always refreshing in a world where many seem to make a living by making things overly complicated.A few months ago, Research Magazine published this interview with Nick entitled Nick Murray’s Hard Truths for Advisors. Here are a few of our favorite excerpts:

Research: Lots of changes are occurring in 2015—the end of QE, of course; interest rates probably rising; high volatility. Is this a particularly critical year for financial advisors?

Nick Murray: That's getting into current events and the market—and that way lies madness. An advisor who focuses on those is doomed. He's a lost soul because he thinks his job is selection and timing. Nobody's job is selection and timing; everybody's job is planning. As soon as you start thinking about the economy and the market, the brain freezes.

But surely an advisor should be aware of what's happening in the world.

Yes, but you don't change anything. All financial success comes from acting on a plan. A lot of financial failure comes from reacting to the market. Put that on my tombstone! It's the mega-truth. If an advisor emphasizes portfolio selection and timing, he may be impeaching his own value proposition. No advisor can constantly deliver superior selection and timing: alpha. An advisor who positions himself as providing alpha in return for his fee is setting up a guaranteed negative value proposition.

Many FAs have difficulty probing clients about their life, what's important to them and their goals. How does that affect their practice?

Somebody who has that trouble should give really serious thought to leaving the business. If you can't find out what people's emotions are about money, what they dream of and what they fear, I don't know how you can build a relationship or create a plan.

So advisors must create both a retirement accumulation plan and a retirement outcome plan?

It's critical that, during the accumulation phase, people work on a plan—otherwise they’ll fail. As they approach retirement, it's critical that they have a rational distribution plan—otherwise they’ll fail; that is, outlive their money.

Doing a plan seems a good way to engage the client and build the relationship.

It's the only way to engage the client. Everything else is sand.

Of what value is behavioral coaching with clients?

It's a major element of an advisor's capability. He can add significant value—and further enhance his value proposition—by helping clients not to react inappropriately to market volatility.

At what point, then, should an advisor be conducting behavioral coaching?

From the outset, clients need to be instructed in the ordinariness of market declines—an average of 14% annually since 1980 and, perhaps, an average of twice that [amount] one year in six—and that all declines are temporary interruptions of the permanent uptrend. “This too shall pass” must always be the watchword to counteract the impulse that says, “This time is different.”